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Small Businesses Are Facing Higher Costs and Interest Rates. Here Are 6 Steps to Stave Off a Crisis. For many proprietors, variable-rate small-business loans are a common part of business. Yet, their borrowing costs are set to skyrocket to double digits this year due to Fed rate hikes. Small and medium-sized business owners can't fight the Fed, but there are a few other things they can do to save — and even grow — their businesses.

By Steven Garibell

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

The Main Street economy is facing some stiff headwinds.

The Federal Reserve is expected to keep boosting interest rates this year. That could push the rate on Small Business Administration loans to 10%, the highest in 15 years. Add in higher wages and supply costs, and small business owners are feeling the pain.

Heavier borrowing costs weigh down the entire economy. They sabotage everything from your monthly expenses to your inventory customers' ability to pay on time. Yet there are steps owners can take now to minimize the damage — before cash flow troubles rear their head.

Related: Americans 'Reluctant' to Spend Big, New Fed Report Reveals — Here's What It Means

Higher everything

Take the typical restaurant owner with a $500,000 variable SBA loan. Their monthly payments are now $1,500 more than they were two years ago. So, they must find the money at a time when inflation is also hitting their patrons, who may be inclined to curb discretionary spending.

Their workers' wages are estimated to rise 4.6% this year, according to a survey by WTW, an advisory company. That's atop the 5.1% hit they took last year. Meanwhile, 23 states enacted higher minimum wages in January, translating to higher payroll taxes and workers compensation insurance payments. Despite the revenue burst they may have enjoyed post-pandemic, their profits are likely heading in the other direction.

The restaurant owner's customers, of course, know none of this. All they see is that $17 hamburger and think the owner is getting rich. As a result, the owner fears that raising prices will only court more trouble.

If they're like most small business owners, they'll instead trim employee bonuses and engagement and even payroll in dire cases. They'll likely slice marketing as well. In the midst of hardship, there's a tendency to cut things that don't appear to have an immediate return on investment — even if it risks long-term growth. There's a good chance they'll reserve the greatest pain for themselves, slashing their own salary. They don't feel comfortable asking others to sacrifice. Even if they did, a tight labor market won't allow it.

Such moves might forestall immediate troubles — at least for a while. But they don't exactly put you in a position to prosper once those troubles abate. In the next 12 months, 47% of business owners say they'll need loans or have other credit needs, according to an internal TD Bank survey of 650 East Coast businesses with less than $10 million in annual revenue.

Related: How to Get Banks to Say Yes to Your Small Business Loan

What you can do now

Here's how to build a sturdier foundation before higher inflation and interest rates cause irreparable damage:

Improve your accounts receivables: Your supply customers are struggling, too. As payments slip toward 60 days, so does your cost of capital if you're drawing from a line of credit to solve cash flow issues. Consider offering them a discount of 3% if payment is made in 15 days. You should also consult your banker; they can help identify products and services to streamline collections.

The credit card advantage: Some owners are making use of credit cards to purchase materials and pay for monthly expenses. If used responsibly, they offer a 30-day float to extend your cash flow cycle. They also come with rewards programs that put cash in your pocket at the end of the year. As long as you make payments on time, credit cards are cheaper than drawing from that line of credit.

Raise prices: If your costs have risen by double digits, don't be afraid to raise prices and don't be shy to tell your customers. Customers understand what's happening in the world. They're seeing it everywhere, from the grocery store to ecommerce sites. If kept in line with your competition, you won't be alone.

Study your competitors: Competition is great for small businesses. It demonstrates a need for your services, and your rivals can be used as incubators for new ideas, especially those down the street. Are they innovating in ways you're not? Adding products or services that you might also consider? Are they better at attracting employees and retaining talent? Send employees to experience what it's like in rivals' stores. Read their Google and Yelp reviews. Remember: You're competing not just on price but on perceived consumer value. There may be simple things you can replicate to drive revenue or lower employee attrition costs. Competitors can also provide cautionary warnings of things to avoid.

Related: 4 Ways to Deal With High Interest Rates in Every Part of Your Business

Pay yourself: Your sacrifice is noble. But as the owner, you're essentially the brand. It's never wise to skimp on your foremost asset. Your salary should reflect that.

Get free advice: Finally, don't feel like you're alone in all this. Small businesses survived the pandemic and they'll survive the aftermath, too. Small business development centers offer free technical assistance and resources. Local chambers of commerce are great for matching you with people who can help. Your lawyer, accountant and banker also have expertise to offer — and they'd much prefer to be part of the solution now, before something breaks.

Steven Garibell

Vice President Diverse Business at TD Bank

Steven Garibell is the vice president of diverse business for TD Bank. He's also a graduate of the Risk Management Association for Commercial Lenders and a board member of numerous non-profits, including those focused on LGBTQ+ communities, chambers of commerce and educational organizations.

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